Lord McNally: My Lords, I am sorry to interrupt the Minister, but surely that is why we are part of a European single market. If we were an offshore financial centre, that would not necessarily apply. It is not that I underestimate the power of the City. What worries me sometimes is its complacency.

Lord Mackay of Ardbrecknish: My Lords, one of the lessons of the past 50 years is the fact that all of us in this country must guard against complacency. I believe that the noble Lord mentioned the motor cycle industry as an example of complacency. That led to the industry being totally superseded by the Japanese motorbike industry which certainly showed considerable aggression and no complacency at all. Therefore, we must guard against it, and that includes the City.

The latter point allows me to turn to what has been the core of tonight's discussion; namely, the question of convergence of the MU and whether or not we would

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join. I shall start by saying that I believe we are in an enviable position over the single currency in that we have a choice about whether or not to join. That means we can make a decision when we have a clearer view of exactly what joining the single currency entails for Britain.

I have to say that I am not entirely sure about the party opposite. I have spent some weeks considering the matter. Every time it is debated I wonder to myself whether the party opposite actually approves of the choice or would it ask us to abandon that choice, tear up our opt-out and make the decision today that we will enter the MU if the convergence factors are right in 1998-99. That is an interesting question; indeed, it is one for which I have never actually been able to find an answer. It is perhaps true to say that the party opposite has come from a position of absolute and total hostility to the European Union in my political lifetime--starting in 1979 when I became a Member of the other place--to now being with us in favour of the European Union and of the all important single market. I would say to the noble Lord, Lord McNally, that I do not think we ought to get ourselves trapped into thinking that the single market necessarily needs a single currency for it to work, and that if it does not have a single currency it will somehow disintegrate. That would be damaging. I shall return to that matter in a few moments because I wish to underline that point.

Right now with the option there on the table for us to decide nearer the time whether or not to join the single currency we are playing a full part with our European partners in the work which is needed to determine what preparations will be necessary for the single currency. If we join that single currency, it is important that the details are acceptable to the British public. That was the point I made at the beginning of my remarks when I agreed with what the noble Lord, Lord McNally, said on that point. If we do not join, the single currency will still affect British commerce, industry and our financial institutions when they do business in Europe, as well as individuals when they take their holidays in the European sun.

Whatever the final decision on membership, it is in our best interests to be fully involved in that work. We are involved in it, and we intend to continue to be involved. However, we believe that we are not now in a position to assess the pros and cons of joining at this stage. It is impossible to tell what the circumstances will be in two or three years' time. My right honourable friend the Prime Minister has put it this way; namely, that we should not operate on hunches but on facts. That underlines the value of our opt out. We shall seek to join if it is in our national interests to do so. We shall make that decision on a hardheaded assessment of the pros and cons.

Every day the serious newspapers contain articles written by people either from this country or from Europe underlining the point that the single currency will be an exercise of unprecedented scale and complexity. If it is to succeed, it must be based on firm economic foundations because if it were to fail that would have disastrous consequences for the European

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Union. It cannot be in Europe's interests to proceed to a single currency before the economic conditions are right. Roughly 50 per cent. of our trade is with Europe. Given the importance of our trade with Europe, we have a strong interest in making sure that the single currency works, whether or not we are in it. The Government put emphasis on the convergence criteria of inflation and public finances set out in the Maastricht Treaty. I underline that point in response to what the noble Lord, Lord Eatwell, said. The criteria aim to ensure that economies are moving in the right direction towards economic convergence which is a necessary condition for economic and monetary union.

It is important that member states bear down on inflation and control their fiscal deficits. We believe that the convergence criteria project the right message and represent sound economics in their own right, EMU or not. The noble Lord, Lord Eatwell, accused me of feeling unrestrained glee at the difficulties of France and Germany. If the noble Lord had been present during last night's debate, he would have heard me say clearly that we are not pleased with the problems that the French and Germans are experiencing because France and Germany are important markets for our goods and services. If they are experiencing an economic downturn, that is not good news for our all important exports to their markets. However, we believe we should look at what is happening there and see whether there are lessons to be learnt for the whole of Europe and for ourselves as regards deficits and increased welfare spending without much thought given as to how one controls that. That is the real problem in France. It is also a problem in Italy. The Germans have taken some steps--one hopes those are sufficient--to attempt to meet some of the problems that they have. However, I must say to the noble Lord, Lord Eatwell, that I do not accept that either myself or my honourable or right honourable friends feel unrestrained glee at the difficulties experienced by France and Germany.

I was asked whether the convergence criteria are the only criteria which apply in this area. No, they are not the only criteria. They are not sufficient in themselves. We need to consider other factors, too. We must look at the trends of the time and--dare I say it?--at employment and unemployment, which worries all the countries of the European Union. Many of those countries are in a much worse position regarding unemployment than this country. We believe that not only must we have durable convergence and steady growth to make the single currency sustainable, but we must also have in place trends in employment and other areas which will make convergence sustainable. As was pointed out in the Economist--I believe a couple of weeks ago--it is perhaps not just the convergence criteria which are needed to achieve the single currency which are important, but it is also important to maintain the economies of the different countries who join in a convergent state. If that does not happen, the pressures inside a single currency could easily cause it considerable damage, if not cause an explosion. That would be damaging to the idea that we have built up so painfully over all these years of a European Union and

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a single market. EMU requires durable convergence and sustainable growth. We cannot know for certain now what countries will be able to meet those conditions when we reach Stage 3 in 1999. What is clear is that not everyone will be able to meet those conditions in 1999. The latest evidence shows that only a minority of countries will have fulfilled the conditions. That leads me to the most important point made by both noble Lords; namely, if EMU goes ahead with only a minority of member states, what pressures will that create? As I have just said, those pressures could threaten the future of the European Union.

The prospect of a group of "ins" and "outs"--the "ins" part of the Euro currency bloc, and the "outs" who either do not want to join or cannot join because of a lack of convergence--raises a number of crucial questions which, as the Prime Minister has made clear, must be addressed. At the summit of European leaders in Madrid last December he succeeded in persuading his colleagues that the questions raised should be studied now because the creation of a group of "ins" and "outs" within the European Union could impinge seriously on the way it works, and on the successful way it has worked for a number of years. We yield to no one in our support of the single European market. It is vitally important that nothing damages that single European market when and if the Euro comes into being.

I was asked about the Chancellor's letter regarding the "ins" and "outs". That letter was intended to follow up the agreement made at the Madrid European Council on the need to investigate the relationship between the "ins" and "outs". Whether we are in the "ins" or in the "outs", it is important that these matters are investigated. We have stressed the importance of sorting out these issues whether we participate. These issues will be discussed by Ministers and officials during the next few months and I hope that sensible conclusions can be arrived at so that if there is a situation of "ins" and "outs", the single market will be able to continue and will not be damaged.

I may not have answered directly some of the questions put to me; but by giving an exposition of where the Government stand on the single currency and the convergence criteria, and what happens to the "ins" and "outs", I hope that I have answered a number of questions posed by both noble Lords. What we are discussing this evening gives the Commission the information to help it make judgments about how we are managing to meet the convergence criteria. I could not help but notice that in last year's report the Commission pointed out that we still had a little work to do. It commended the United Kingdom Government on keeping control of public spending. I very much hope that the noble Lord, Lord Eatwell, and his party will join us in that important aspect of keeping a tight control on public spending. On the next occasion that I, as a Minister from the largest spending department, make some proposals to control my department's budget as part of the control of public spending, I hope that I shall have the support of the party opposite. That would be a novel experience.

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I hope that I have at least addressed the most important points made by both noble Lords. I make no apology for repeating my next point in a different way. I believe that whatever happens as regards the United Kingdom and the single European currency, that will affect every country whether they are in or out of it. It is vitally important that the economic conditions throughout the whole of Europe not just converge between now and the decision dates in 1998 and 1999,

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but also continue to converge after that for the sake of the whole enterprise of the single market and the prosperity it has already brought to the participating countries. I believe the single market can continue to bring that prosperity not just to the participating countries but also to those countries who wish to join it.